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Capitalisation on TUPE

Tax treatment of employee costs of previous business on employees transferred under TUPE

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Hi All,

Happy Friday!

I have a client that recently purchased a beauty salon from a company that went into liquidation.  The employees are on PAYE and they're paid a percentage of the revenue they generate.

When the salon was purchased it was a couple of weeks into the pay period and as a result my client covered the cost of such commission without any related income when the employees were paid at the end of the month.  I think this should therefore be treated as a cost of the acquisition and capitalised but I'm not sure how the Tax relief would work.  I can't see that this would qualify as AIA.

I'd love to have anyones thoughts on this.

 

Thanks

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By paul.benny
31st Jul 2020 13:58

How much? A few hundred pounds, a thousand, even?
I'd treat it as a revenue expense.

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By weiss
31st Jul 2020 15:11

It's a high end salon so we're talking tens of thousands

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By paul.benny
31st Jul 2020 17:51

Wow. Lucky staff.

I'd still treat it as a revenue expense for tax purposes. After all, it's just a payroll cost that the new owners inherit due to TUPE.

Whether or not you treat as part of the acquisition cost (and therefore goodwill) depends on whether the new owner is focussed on EBITDA or operating profit. I don't see any inherent conflict in different tax and stat accounts treatments.

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By Tax Dragon
01st Aug 2020 12:03

I doubt it's as simple as Paul makes out. (That is, I'm not convinced by his "this is what I would do" argument. Guts are useful; legislative references more so.)

Although this is surely a common situation, and although it feels to me (my gut in action :¬)) as if there ought to be specific legislation to deal with it, I don't know the answer. Or the legislation.

Absent legislation, 'persuasive' case law doesn't help. See BIM35655 and the NZFRI case.

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By paul.benny
01st Aug 2020 21:54

With the caveat that I'm not a lawyer, the cases on the HMRC manual refer to the buyer assuming liabilities of the seller. Here the liabilities transfer to the buyer by action of law irrespective of any agreement between the parties.

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By Tax Dragon
01st Aug 2020 23:34

I'm not a lawyer either, but the logic expounded in the NZFRI case seems to be that the purchase price would reflect the liability, so paying the liability is part of the cost of acquisition.

It's not logic that I like or agree with. But that's how I read the BIM extract. Do you read it differently?

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By paul.benny
02nd Aug 2020 09:13

The distinction that I would seek to make is that the insolvency changes the relationship between buyer and seller. Specifically, the commission isn't a liability of the seller (ie the liquidator). The liquidator's job is to maximise the funds available to creditors and then pay out according to priority. If there are sufficient funds the employees will get their full commission; if not, they don't and the liquidator has no further obligation.

If I were the buyer, I would probably want to take a punt on treating the commissions as a revenue expense but I would agree it's not certain HMRC will allow it.

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By Tax Dragon
03rd Aug 2020 08:47

I confess I do not begin to understand that argument.

But I am still not (and never will be) a lawyer.

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